Fitch Ratings changed France’s outlook from “stable” to “negative” late Friday, blaming rising political risks and the country’s growing budget deficit. This came a day after the new government announced its 2025 budget.
“France’s fiscal starting point is worse because of this year’s projected fiscal slippage,” Fitch said in a statement. “We now expect wider fiscal deficits, which will cause government debt to rise sharply to 118.5% of GDP by 2028.” Fitch kept France’s rating at “AA-.”
As for the government’s plan to get the deficit below the EU’s 3% limit by 2029, Fitch thinks it won’t happen. The deficit will be 5.4% of GDP in 2025 and 2026.
France was downgraded by Fitch from AA to AA- in April of last year. The UK and Belgium were also lowered at the same time.
The government of France’s finances have gotten worse this year because tax income wasn’t as high as expected and spending was higher than planned.
At the same time, President Emmanuel Macron caused months of political instability when he decided to dissolve parliament and hold an early election, which resulted in a minority government being formed.
People who own bonds in France sold them because of the move. As a result, France now pays almost 80 basis points more for ten-year debt than Germany, up from less than 50 basis points earlier in the year.
Prime Minister Michel Barnier’s new minority government revealed a 2025 budget on Thursday. It includes €60 billion ($65.6 billion) in spending cuts and tax hikes to bring the deficit down from 6.1% of GDP this year to 5% of GDP. The goal is to get things back on track.
Finance Minister Antoine Armand said in a statement, “The 2025 budget that we just presented shows that the government is determined to get the public finances on a better path and get debt under control.”
This week, the leftist New Popular Front’s attempt to get the new government to step down failed to get enough support. However, that could change if the far-right Rassemblement National, or National Rally, led by Marine Le Pen, backed a future move to censure the government.
“France’s ability to carry out long-term fiscal consolidation policies is hampered by high political fragmentation and a minority government,” Fitch said. “Our base case is that the budget law will be passed before the end of the year, but the government might have to give in order to get support from the opposition.”
France was lowered earlier this year by both Moody’s and S&P. The country may have to go through more reviews of its ratings in the next few weeks.
